LOANS AND ALLOWANCE FOR CREDIT LOSSES

12 Months Ended

Dec. 31, 2011

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES

The Company makes residential mortgage, commercial and consumer loans to customers primarily in the Maryland counties of Talbot, Queen Anne’s, Kent, Caroline and Dorchester and in Kent County, Delaware. The following table provides information about the principal classes of the loan portfolio at December 31, 2011 and 2010.

(Dollars in thousands)	2011			2010
Construction	$	119,883		$	143,952
Residential real estate		321,604			333,738
Commercial real estate		315,439			318,726
Commercial		69,485			82,787
Consumer		14,639			16,201
Total loans		841,050			895,404
Allowance for credit losses		(14,288	)		(14,227	)
Total loans, net	$	826,762		$	881,177

Loans include deferred costs net of deferred fees of $188 thousand at year-end 2011 and $38 thousand at year-end 2010.

In the normal course of banking business, loans are made to officers and directors and their affiliated interests. These loans are made on substantially the same terms and conditions as those prevailing at the time for comparable transactions with persons who are not related to the Company and are not considered to involve more than the normal risk of collectibility. As of December 31, 2011, and 2010, such loans outstanding, both direct and indirect (including guarantees), to directors, their associates and policy-making officers, totaled approximately $22.4 million and $20.0 million, respectively. During 2011 and 2010, loan additions were approximately $4.4 million and $2.1 million, respectively, and loan repayments were approximately $2.0 million and $1.3 million, respectively.

A loan is considered impaired if it is probable that the Company will not collect all principal and interest payments according to the loan’s contractual terms. An impaired loan may show deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral. The impairment of a loan is measured at the present value of expected future cash flows using the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Generally, the Company measures impairment on such loans by reference to the fair value of the collateral. Income on impaired loans is recognized on a cash basis, and payments are first applied against the principal balance outstanding (i.e., placing impaired loans on nonaccrual status). Impaired loans do not include groups of smaller balance homogenous loans such as residential mortgage and consumer installment loans that are evaluated collectively for impairment. Reserves for probable credit losses related to these loans are based on historical loss ratios and are included in the formula portion of the allowance for credit losses.

Loans are evaluated on a case-by-case basis for impairment. Once the amount of impairment has been determined, the uncollectible portion is charged off. In some cases, a specific allocation within the allowance for credit losses is made until such time as a charge off is made. Impaired nonaccrual loans were $51.4 million and $36.2 million at the end of 2011 and 2010, respectively. At December 31, 2011, impaired nonaccrual loans had been reduced by partial charge-offs totaling $13.5 million, or 20.8%, of the aggregate unpaid principal balance. In addition, $1.5 million in specific reserves were established against $4.7 million of impaired nonaccrual loans. At December 31, 2010, impaired nonaccrual loans had been reduced by partial charge-offs totaling $8.3 million, or 18.6%, of the aggregate unpaid principal balance. In addition, $203 thousand in specific reserves were established against $837 thousand of impaired nonaccrual loans.

A loan is considered a troubled debt restructuring if a concession is granted due to a deterioration in a borrower’s financial condition. At both December 31, 2011 and 2010, the Company had impaired accruing troubled debt restructurings of $25.2 million.

Gross interest income of $2.6 million, $2.1 million and $859 thousand would have been recorded in 2011, 2010 and 2009, respectively, if impaired loans had been current and performing in accordance with their original terms. There was no interest recorded on such loans during 2011 or 2010. There was $4 thousand in interest recorded during 2009.

The following tables provide information on impaired loans by loan class as of December 31, 2011 and 2010.

(Dollars in thousands)	Unpaid principal balance		Recorded investment with no allowance		Recorded investment with an allowance		Related allowance		Average recorded investment
December 31, 2011
Impaired nonaccrual loans:
Construction	$	22,883	$	14,005	$	1,550	$	170	$	16,555
Residential real estate		22,431		16,925		3,181		1,296		15,430
Commercial real estate		17,372		14,012		-		-		14,624
Commercial		2,119		1,669		-		-		2,539
Consumer		30		28		-		-		32
Total		64,835		46,639		4,731		1,466		49,180
Impaired accruing restructured loans:
Construction		11,781		11,781		-		-		10,663
Residential real estate		3,792		3,792		-		-		6,093
Commercial real estate		9,566		9,566		-		-		7,960
Commercial		69		69		-		-		111
Consumer		-		-		-		-		-
Total		25,208		25,208		-		-		24,827
Total impaired loans:
Construction		34,664		25,786		1,550		170		27,218
Residential real estate		26,223		20,717		3,181		1,296		21,523
Commercial real estate		26,938		23,578		-		-		22,584
Commercial		2,188		1,738		-		-		2,650
Consumer		30		28		-		-		32
Total	$	90,043	$	71,847	$	4,731	$	1,466	$	74,007

(Dollars in thousands)	Unpaid principal balance		Recorded investment with no allowance		Recorded investment with an allowance		Related allowance		Average recorded investment
December 31, 2010
Impaired nonaccrual loans:
Construction	$	22,643	$	17,261	$	-	$	-	$	19,380
Residential real estate		11,983		9,132		837		203		8,788
Commercial real estate		5,558		5,133		-		-		3,827
Commercial		4,305		3,845		-		-		3,191
Consumer		30		30		-		-		56
Total		44,519		35,401		837		203		35,242
Impaired accruing restructured loans:
Construction		10,914		10,914		-		-		3,110
Residential real estate		5,561		5,561		-		-		4,658
Commercial real estate		8,147		8,147		-		-		2,129
Commercial		529		529		-		-		171
Consumer		-		-		-		-		-
Total		25,151		25,151		-		-		10,068
Total impaired loans:
Construction		33,557		28,175		-		-		22,490
Residential real estate		17,544		14,693		837		203		13,446
Commercial real estate		13,705		13,280		-		-		5,956
Commercial		4,834		4,374		-		-		3,362
Consumer		30		30		-		-		56
Total	$	69,670	$	60,552	$	837	$	203	$	45,310

The following tables provide information on troubled debt restructurings by loan class as of December 30, 2011 and 2010. The amounts include nonaccrual troubled debt restructurings.

(Dollars in thousands)	Number of contracts		Premodification outstanding recorded investment		Postmodification outstanding recorded investment
Troubled debt restructurings:
December 31, 2011
Construction		9	$	12,981	$	12,539
Residential real estate		20		11,471		10,359
Commercial real estate		20		15,874		14,175
Commercial		1		69		69
Consumer		-		-		-
Total		50	$	40,395	$	37,142
December 31, 2010
Construction		5	$	11,075	$	10,926
Residential real estate		31		7,986		7,388
Commercial real estate		16		9,424		9,417
Commercial		3		529		529
Consumer		-		-		-
Total		55	$	29,014	$	28,260

(Dollars in thousands)	Number of contracts		Recorded investment
Troubled debt restructurings that subsequently defaulted:
December 31, 2011
Construction		3	$	758
Residential real estate		10		7,353
Commercial real estate		5		6,751
Commercial		-		-
Consumer		-		-
Total		18	$	14,862
December 31, 2010
Construction		1	$	12
Residential real estate		13		2,752
Commercial real estate		6		4,103
Commercial		-		-
Consumer		-		-
Total		20	$	6,867

Management uses risk ratings as part of its monitoring of the credit quality in the Company’s loan portfolio. Loans that are identified as special mention, substandard and doubtful are adversely rated and are assigned higher risk ratings than favorably rated loans.

The following tables provide information on loan risk ratings as of December 31, 2011 and 2010.

(Dollars in thousands)	Pass/Performing		Special mention		Substandard		Doubtful		Nonaccrual		Total
December 31, 2011
Construction	$	50,403	$	30,373	$	23,552	$	-	$	15,555	$	119,883
Residential real estate		261,910		13,467		25,676		445		20,106		321,604
Commercial real estate		257,247		16,001		28,179		-		14,012		315,439
Commercial		59,178		3,813		4,748		77		1,669		69,485
Consumer		14,520		32		59		-		28		14,639
Total	$	643,258	$	63,686	$	82,214	$	522	$	51,370	$	841,050

(Dollars in thousands)	Pass/Performing		Special mention		Substandard		Doubtful		Nonaccrual		Total
December 31, 2010
Construction	$	83,344	$	23,090	$	20,257	$	-	$	17,261	$	143,952
Residential real estate		283,895		23,847		13,752		2,275		9,969		333,738
Commercial real estate		260,040		17,821		35,732		-		5,133		318,726
Commercial		73,502		2,249		3,088		103		3,845		82,787
Consumer		16,043		-		128		-		30		16,201
Total	$	716,824	$	67,007	$	72,957	$	2,378	$	36,238	$	895,404

The following tables provide information on the aging of the loan portfolio as of December 31, 2011 and 2010.

	Accruing
(Dollars in thousands)	Current		30-59 days past due		60-89 days past due		90 days or more past due		Total past due		Non- accrual		Total
December 31, 2011
Construction	$	102,441	$	1,246	$	316	$	325	$	1,887	$	15,555	$	119,883
Residential real estate		289,459		4,417		5,291		2,331		12,039		20,106		321,604
Commercial real estate		289,760		10,073		1,594		-		11,667		14,012		315,439
Commercial		64,581		1,350		1,819		66		3,235		1,669		69,485
Consumer		14,492		112		6		1		119		28		14,639
Total	$	760,733	$	17,198	$	9,026	$	2,723	$	28,947	$	51,370	$	841,050

	Accruing
(Dollars in thousands)	Current		30-59 days past due		60-89 days past due		90 days or more past due		Total past due		Non- accrual		Total
December 31, 2010
Construction	$	124,892	$	1,691	$	108	$	-	$	1,799	$	17,261	$	143,952
Residential real estate		314,914		4,046		1,355		3,454		8,855		9,969		333,738
Commercial real estate		306,497		3,393		2,717		986		7,096		5,133		318,726
Commercial		77,833		470		465		174		1,109		3,845		82,787
Consumer		15,572		486		25		88		599		30		16,201
Total	$	839,708	$	10,086	$	4,670	$	4,702	$	19,458	$	36,238	$	895,404

	Accruing
	Current			30-59 days past due			60-89 days past due			90 days or more past due			Total past due			Non- accrual
December 31, 2011
Construction		85.4	%		1.0	%		0.3	%		0.3	%		1.6	%		13.0	%
Residential real estate		90.0			1.4			1.6			0.7			3.7			6.3
Commercial real estate		91.9			3.2			0.5			-			3.7			4.4
Commercial		93.0			1.9			2.6			0.1			4.6			2.4
Consumer		99.0			0.8			-			-			0.8			0.2
Total		90.5			2.0			1.1			0.3			3.4			6.1

	Accruing
	Current			30-59 days past due			60-89 days past due			90 days or more past due		Total past due			Non- accrual
December 31, 2010
Construction		86.8	%		1.1	%		0.1	%		-%		1.2	%		12.0	%
Residential real estate		94.4			1.2			0.4			1.0		2.6			3.0
Commercial real estate		96.2			1.0			0.9			0.3		2.2			1.6
Commercial		94.0			0.6			0.6			0.2		1.4			4.6
Consumer		96.1			3.0			0.2			0.5		3.7			0.2
Total		93.8			1.2			0.5			0.5		2.2			4.0

Management has established an allowance for credit losses, which is increased by provisions charged against earnings and recoveries of previously charged-off debts and is decreased by current period charge-offs of uncollectible debts. Management evaluates the adequacy of the allowance for credit losses on a quarterly basis and adjusts the provision for credit losses based on this analysis. Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb losses in other loan classes.

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for 2011 and 2010.

(Dollars in thousands)	Construction			Residential real estate			Commercial real estate			Commercial			Consumer			Unallocated			Total
2011
Allowance for credit losses:
Beginning balance	$	3,327		$	4,833		$	3,665		$	1,422		$	637		$	343		$	14,227
Charge-offs		(4,236	)		(7,693	)		(5,037	)		(3,388	)		(202	)		-			(20,556	)
Recoveries		49			120			361			549			68			-			1,147
Net charge-offs		(4,187	)		(7,573	)		(4,676	)		(2,839	)		(134	)		-			(19,409	)
Provision		4,605			7,754			4,426			2,915			91			(321	)		19,470
Ending balance	$	3,745		$	5,014		$	3,415		$	1,498		$	594		$	22		$	14,288

(Dollars in thousands)	Construction			Residential real estate			Commercial real estate			Commercial			Consumer			Unallocated		Total
2010
Allowance for credit losses:
Beginning balance	$	2,630		$	1,528		$	3,947		$	2,132		$	515		$	124	$	10,876
Charge-offs		(7,910	)		(5,818	)		(492	)		(3,710	)		(589	)		-		(18,519	)
Recoveries		14			215			108			214			200			-		751
Net charge-offs		(7,896	)		(5,603	)		(384	)		(3,496	)		(389	)		-		(17,768	)
Provision		8,593			8,908			102			2,786			511			219		21,119
Ending balance	$	3,327		$	4,833		$	3,665		$	1,422		$	637		$	343	$	14,227

The following tables include impairment information relating to loans and the allowance for credit losses as of December 31, 2011 and 2010.

(Dollars in thousands)	Construction		Residential real estate		Commercial real estate		Commercial		Consumer		Unallocated		Total
December 31, 2011
Loans individually evaluated for impairment	$	27,336	$	23,898	$	23,578	$	1,738	$	28	$	-	$	76,578
Loans collectively evaluated for impairment		92,547		297,706		291,861		67,747		14,611		-		764,472
Total loans	$	119,883	$	321,604	$	315,439	$	69,485	$	14,639	$	-	$	841,050
Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	170	$	1,296	$	-	$	-	$	-	$	-	$	1,466
Loans collectively evaluated for impairment		3,575		3,718		3,415		1,498		594		22		12,822
Total allowance for credit losses	$	3,745	$	5,014	$	3,415	$	1,498	$	594	$	22	$	14,288

(Dollars in thousands)	Construction		Residential real estate		Commercial real estate		Commercial		Consumer		Unallocated		Total
December 31, 2010
Loans individually evaluated for impairment	$	28,175	$	15,530	$	13,280	$	4,374	$	30	$	-	$	61,389
Loans collectively evaluated for impairment		115,777		318,208		305,446		78,413		16,171		-		834,015
Total loans	$	143,952	$	333,738	$	318,726	$	82,787	$	16,201	$	-	$	895,404
Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	-	$	203	$	-	$	-	$	-	$	-	$	203
Loans collectively evaluated for impairment		3,327		4,630		3,665		1,422		637		343		14,024
Total allowance for credit losses	$	3,327	$	4,833	$	3,665	$	1,422	$	637	$	343	$	14,227